Ten things to know about foreclosure of an aircraft in Ukraine

Nataliia Murashko of Asters in Kiev outlines the ten things you need to to know about foreclosure of an aircraft in Ukraine

1. Special status of an aircraft
Ukrainian legislation envisages special treatment for aircraft. Under the Civil Code, the immovable property regime can be extended and apply to aircrafts by virtue of specific law. Such law was never passed, and as a rule of thumb aircraft are treated as movable property. However, for the purposes of security over aircraft, it is treated as immovable property, as expressly stated in the Law on Mortgages № 898-IV dated June 5 2003. Taking into account significant value of aircraft, application of immovable property regime allows additional protection of creditors.

2. Foreclosure options
In case of default, the creditor can apply various mechanisms of aircraft foreclosure available under Ukrainian law. The Convention on International Interests in Mobile Equipment ("Cape Town Convention") and Protocol on Matters Specific to aircraft Equipment ("Protocol") to it was ratified by Ukraine in 2012 and became a part of national legislation. Additionally, provided all necessary requirements are met, the foreclosure can be performed by means of (i) agreement between parties; (ii) notary's writ; (iii) arbitration; or (iv) court decision.

3. Remedies under Cape Town Convention
The Cape Town Convention will be applicable if at the time of the conclusion of the agreement creating security over an aircraft, the debtor was situated in state, which is a party to the Cape Town Convention. Having introduced a special reservation, Ukraine emphasised that Cape Town Convention shall not apply to transactions which constitute an internal transaction in relation to Ukraine. Provided abovementioned requirements are satisfied, the creditor is eligible to (i) take possession or control of aircraft charged to it; (ii) sell or grant a lease of aircraft; (iii) collect or receive any income or profits arising from the management or use of aircraft. Any remedy available to the creditor under any provision of Cape Town Convention may be exercised without leave of court, unless contrary is stated in the text of Convention.

Under the Protocol, the Creditor may also procure (i) de-registration of the aircraft, and (ii) export and physical transfer of the aircraft object from the territory in which it is situated, provided he possesses irrevocable deregistration and export request authorisation (IDERA) issued by the debtor and registered with the State Aviation Authority.

4. Contractual solutions
Extrajudicial foreclosure of an aircraft is available, provided the parties agree upon it, either by way of (i) inclusion of specific provisions in the agreement establishing security over aircraft or (i) execution of a separate agreement. The contractual remedies are defined by law and are subject to parties' limited choice. The options comprise (i) transfer of the title over aircraft to the creditor (90% of the appraised value of the aircraft, exceeding debtor's obligations must be reimbursed by the creditor) and (ii) granting the creditor a right to sell an aircraft (the debtor and interested parties must be notified 30 days in advance). Application of extrajudicial foreclosure excludes any further demands regarding the principal obligation that was secured by the aircraft.

5. Execution of a writ by a notary
The foreclosure can be performed by way of execution of writ by a notary, provided there is no dispute over existence of the obligation. In this case, the creditor can only obtain the amount of money the debtor owes him (not the title for aircraft). Such amount is received by way of disposal of the aircraft on the public auction, organised under the framework of enforcement procedure, commenced based on the notary's writ.

6. International arbitration
The parties are free to choose any arbitral institution to hear the case in case of a dispute. However, if the arbitral award is subject to enforcement procedure in Ukraine, it must be approved by a local court, which will issue the enforcement writ. Such decision of the court can be further contested in the courts of appeal and cassation, which can be used by bad-faith parties to extend the process.

7. Ukrainian arbitration
Choice of ICAC of Ukrainian Trade and Industry Chamber as arbitral institution will not provide a solution to this problem, as enforcement of such decision will require same lengthy and bureaucratized procedure as described above. The whole process may take over 3 years

8. Court decision
The commercial court at the place location of an aircraft will be the relevant court authorised to hold the hearings of the case. The aircraft is deemed to be located at the address of the airport of its permanent parking location. Decision may be subject to appeal and cassation review, and the process may exceed 1,5 years.

The court decision may provide for foreclosure by way of (i) disposal of the aircraft on the public auction, or (ii) disposal of the aircraft by the creditor (debtor will be entitled to reimbursement of 90% of aircraft's appraised value exceeding his obligations).

9. Auction procedure
Public auction procedure will be applied where foreclosure is performed based on (i) notary's writ; (ii) relevant court decision specifying this method of foreclosure. Public auction must be held within 2 months from the moment of submission of application to the relevant enforcement authority. The starting price is defined by the court or by agreement of parties.

10. Money/aircraft transfer issues
If the court decision specifically states so, the auction may be held in foreign currency. The proceeds from the sale of the aircraft by way of auction must be transferred to the special account of enforcement service in foreign currency, which does not exist in practice. This results in significant difficulties in receipt of proceeds by the creditor from state enforcement service. Notably, private enforcement service will commence functioning in October 2016 and might be a solution to this issue.

Provided the creditor receives the aircraft itself, it must be sold or exported from country within six months. The State Aviation Authority can perform de-registration procedure in any country of the world, provided the travel expenses of the officers are reimbursed by the interested party.

The best way to protect creditor's interest would be registration of IDERA, next option – execution of additional agreement specifying foreclosure procedure simultaneously with establishment of security over the aircraft.

Nataliia Murashko

Asters

Kiev